Rishi Sunak must reject Davos groupthink

This time last year, the Davos business and political jet-set were asked to list the 10 most serious risks facing the world economy.

The top three – and five of the top eight – related to the environment. “Geo-economic confrontation” was ranked 10th, in last place.

A month later, Russia invaded Ukraine – upending global commerce and making a mockery of the well-heeled Davos sages. The UK, US and other allies have since been locked in a full-on economic war with Russia. Tensions have escalated with China and also India – which is making hay re-exporting Russian oil, exploiting a sanctions loophole.

“Geo-economic confrontation” could be the leitmotif of 2022.

Last January, as much of the world emerged from lockdown, we expected a post-Covid bounce back. Yet supply chain blockages persisted and conflict in Ukraine caused the price not just of energy to soar, but that of fertiliser and staple crops, too.

Thankfully, UK inflation is falling, the Office for National Statistics confirmed last week. The consumer price index was 10.5pc higher in December than the same month the previous year – down from 10.7pc in November and 11.1pc the month before. The worst of this inflation surge must surely be over.

But with food inflation still at 16.9pc – and prices of basics such as milk, bread and eggs rising even more sharply – this ghastly cost of living squeeze still has a long way to go.

The main theme at this year’s World Economic Forum was “co-operation in a fragmented world” – which strikes me as nearer the mark, albeit belatedly. With many large emerging markets refusing to isolate Russia, Western sanctions seem unlikely to force Moscow to sue for peace any time soon. But something else seems to be happening – the end of the age of globalisation and economic liberalisation, with even advanced industrial nations now toying with the prospect of ever more government control. For most of the past 70 years, the global economy has grown strongly, with international trade rapidly expanding. This cross-border integration was turbo-charged after the Berlin Wall fell in 1989, with the opening of former communist countries, particularly the trade liberalisation of China.

This has been a triumph of capitalism, as numerous nations, previously shuttered from market forces, have focused on overseas trade and innovation. This has driven the fastest growth in global GDP per head in history, lifting literally billions of people out of poverty.

After the 2008 financial crisis, Western economies began to falter. As ageing societies, we became drunk on ever more debt and central bank largesse, failing to recapture the growth and productivity gains of the late 20th century.

Meanwhile, the likes of China and India, and to a lesser extent Russia, Brazil and Indonesia, rapidly grew. In their own non-Western variants of capitalism, their governments still played massive commercial roles.

War in Ukraine has sparked a complete rethink of the West’s strategic priorities. But we’re at an inflection point in economic policymaking, too – less sharp than the geopolitical shift, but still significant.

Across the Western world, not least in Britain, governments are becoming more interventionist, with taxes rising and the state almost subconsciously trying to become more powerful.

This stems in part from the growth of the still government-dominated emerging giants, and the now undeniable threat they pose to Western hegemony. But there was also the shock of lockdown – with previously light-touch governments massively over-reaching, paying for enforced worker idleness by gorging on yet more money-printing and debt.

I was mulling these lofty themes during a trip to the North East of England last week, after news that Britishvolt had gone bust. That’s the company behind the proposed £3.6billion gigafactory that would mass-produce complex batteries for the electric vehicles, meant to secure the region’s car-making future.

Coal exports and manufacturing allowed the North East to help kickstart the industrial revolution.

Now Tyneside and Teesside are to host Britain’s new “green industrial revolution” – with attention focused on Cambois, just north of Newcastle, where the new gigafactory is due to be built. Formerly housing a power station, the site is already hooked up to the national grid. It’s also next to Blyth, a deep-water port connected to countless offshore turbines – including the massive Dogger Bank wind farm, due to come on stream later this decade. That could power not just one but a host of battery-making gigafactories, completing the fabled “generation-to-storage cycle”, while creating thousands of “green jobs” across one of the UK’s poorest regions.

The trouble is, despite the Cambois site’s potential, and a lot of hype, Britishvolt has failed to raise the capital needed to unlock a £100million government-funding facility conditional on private investment.

Some say that’s because the headlong rush to electric vehicles is misguided and will rapidly reverse – with the UK scrapping its pledge to ban sales of new petrol and diesel vehicles by 2030. Sceptics worry the batteries rely on rare earth minerals found in China and Africa, making the industry geopolitically vulnerable.

Yet canny investors know that the Tories’ electoral fortunes hinge on proving that levelling up is more than just a slogan, so as to retain at least some of the Red Wall seats they gained in 2019. As such, given the symbolic importance of this Cambois plant, the moneymen may instead be waiting for Downing Street to sweeten the deal even more, weighing in with yet more Government money over the coming months – to get spades in the ground before the next general election.

The latest iteration of fashionable Davos groupthink now promotes a “more activist state”, while accepting high taxes as a sign of virtue. Rishi Sunak, too, last week suggested only “idiots” think taxes should now fall.

Perhaps, by the same logic, the Prime Minister will indeed stump up more cash to get a factory built that should stand or fall only on its commercial potential.

If you want to promote business, far better to use tax breaks – or, heaven forbid, avoid raising corporation tax from 19pc to 25pc this spring, which will surely be the last straw for countless lockdown-hammered firms, costing the Treasury more revenue that it raises.

Sunak is, instinctively, no statist. He needs to let those instincts show.

‘Moneymen may be waiting for Downing Street to sweeten the deal even more to get spades in the ground before next election’